Season for Tax Year 2018 has arrived, meaning tax professionals will have to carry out reporting while keeping in mind all the regulatory and policy changes that went into effect in the previous year. But what should tax pros know about the developments likely to take place in 2019? Here are a few trends worth following.
1. States will continue to go their own way on 1099-K reporting thresholds
It’s safe to say that while nobody is quite sure how many Americans work in the gig economy, the IRS is missing an opportunity to maximize revenue collection from a large contingent of part-time workers. States have started to take measures to collect that revenue themselves, a trend that will likely continue in 2019 and complicate reporting for third-party settlement organizations and other similar businesses.
Companies such as rideshare and home-share services, or auction sites, are known as third-party settlement organizations because they process payments from one party to another through an online platform. According to the IRS, they only have to send a form 1099-K to a service provider if the worker earns $20,000 in a year and completes 200 transactions.
Seeking revenue, Massachusetts and Vermont broke from the IRS in late 2017 and moved their state 1099-K reporting thresholds down to $600 with no minimum number of transactions. The move should raise an additional $20 million in Massachusetts and $1.5 million in the small state of Vermont, numbers compelling enough that other states are looking at making similar moves. Tax Notes reports that Pennsylvania, California and Illinois are also considering lowering thresholds.
Every state that lowers a threshold adds potentially thousands of new forms for TPSOs to send to payees and report to the IRS, making reporting that much more expensive, time-consuming and complex. Plus, although Massachusetts and Vermont chose to use the same threshold, there is nothing magic about $600 with no minimum number of transactions. Other states will do as they please, further complicating the TPSO’s task.
At this point, the federal government seems content to let states set thresholds of their own, but enough momentum to derive revenue from lost tax opportunities might spur the federal agency to seek a threshold change of its own. For now, though, states will continue to take the lead in cashing in from the gig economy, piling the pressure on TPSOs to increase form volume and keep up with state-by-state regulatory changes.
2. The growth of online gambling will be a reporting challenge for casinos and online services
The Supreme Court made big news in 2018 when it allowed states to legalize sports gambling, which was previously legal in Nevada but nowhere else. States jumped on the opportunity to reap gambling-related revenues, with seven joining Nevada in legalizing sports betting at brick-and-mortar casinos. Lawmakers in no fewer than 15 more states, and also Washington, DC, have introduced legislation to legalize sports gambling.
The spread of sports gambling is sure to cause the volume of form W-2G, the form used to report gambling winnings (and losses), to skyrocket. But it’s not just sports gambling that is taking off. Online gambling, and not just on sports, is also part of the equation. Playing online poker or blackjack against the “house,” or casino, is a trend that will also boost form volume. Four states already allow online gambling, and legislation is pending in seven more.
Both sports and online gambling are likely to be legal in a significant number of states by the end of 2019. When legal gambling does take off, the number of W-2G forms filed will inevitably grow, and casinos and online gambling services will be the organizations tasked with sending those forms both to gamblers and to the IRS. Handling a large influx of forms could prove challenging, but numbers aren’t the only potential problem that lurks.
Currently, casinos report W-2G forms in states where commercial casinos are legal. That is already a challenge, with states changing, and usually tightening, reporting deadlines in recent tax years. However, as more states continue to pass legislation to legalize betting, casinos and online gambling platforms could face having to report huge numbers of forms in brand new jurisdictions, as each state represents a different jurisdiction with different deadlines and compliance policies.
3. E-gaming will get attention from the IRS and states
A cousin of sorts of online gambling, e-gaming is becoming big enough for states and the IRS to take notice. On platforms such as Twitch, viewers can pay to watch gamers play popular video games, or they can view other live streams. Gamers who get paid to play online are in line to receive a 1099-MISC for nonemployee compensation. In that scenario, a platform such as Twitch would be on the hook for 1099-MISC reporting.
There is more to e-gaming than just watching people play online. E-gaming leagues are growing nationwide, with teams in major cities competing by playing popular games. There is money involved there, too, creating taxable transactions in the form of payments to players and advertisers. Leagues themselves are responsible for reporting payments to third parties via form 1099-MISC.
And then there are the peer-to-peer elements of e-gaming, in which players sell each other in-game items such as weapons or outfits. Those transactions turn the host of the game into a TPSO, which then has a responsibility to report transactions via at 1099-K.
Exactly how much attention the IRS and states pay to e-gaming right now from a reporting perspective is unclear, but given the rapid growth of e-gaming, companies in the space should be prepared for increased scrutiny from tax authorities. If they don’t know what their reporting responsibilities are, they will quickly need to find out and determine how they will execute them.
4. The IRS might drop the FATCA requirement for cash-value life insurance policies
One change from 2018 that flew a bit under the radar was the IRS’s delay of FATCA reporting requirements for cash-value life insurance policies. FATCA is the Foreign Account Tax Compliance Act, which mandates that foreign financial institutions report on foreign assets held by US account holders.
The IRS had originally planned for insurance premiums related to cash-value insurance contracts, as well as contracts with investment options, to be subject to FATCA reporting as of Jan. 1, 2019. However, the agency has since postponed the regulation and might ultimately get rid of it.
Many of the premium payments that are not related to cash-value insurance contracts run through accounts payable departments for payment. FATCA generally excludes all AP-type payments, to the IRS has found the regulation difficult to implement. The IRS will likely update regulations around the definition of a “withholdable” payment to exclude insurance premiums paid on policies that are not cash-value, such as casualty or property policies. But the agency might also drop the regulation altogether rather than choosing to update it.
5. Two new insurance 1099 forms could cause some confusion
Also on the insurance front, two new 1099 forms, the LS and SB, are likely to cause some confusion despite their volume likely being relatively small. There is still some ambiguity around how to report them, and the IRS will likely need to provide some additional guidance, specifically with how they convey information previously reported via the 1099-R.
The 1099-LS is filed by acquirers of life insurance contracts, or any interest in a life insurance contract, in a reportable policy sale. The 1099-SB is filed by issuers of life insurance contracts or policies to report a seller’s investment in the contract and the surrender amount due to transfer in a reportable policy sale.
Both forms act to close the loophole on reporting the sale of a life insurance policy/contract, but insurers aren’t yet clear as to exactly which of their products will require LS and SB forms as opposed to the more established 1099-R. Payment of a death benefit still requires insurance companies to report to the IRS and the investor via the 1099-R: Box 7, Code C.
6. The ACA lives, and mandates will continue to move to states
The Affordable Care Act is still alive despite a federal judge’s decision that ruled part of the law unconstitutional. Both employer reporting mandates and IRS penalties for non-compliance remain in place, but much of the action is no longer at the federal level.
The Tax Cuts and Jobs Act eliminated the ACA individual mandate. As such, individuals who choose not to purchase insurance will no longer be subject to penalties. However, the employer mandate and associated penalties are still intact, so organizations with 50 or more full-time employees are required to provide health insurance or face mandate penalties.
Reporting penalties also remain in place for those eligible employers that fail to report health insurance information to the IRS. For Tax Year 2017, the IRS enforced reporting penalties and deadlines for employers that failed to file or filed incorrect information returns, and the IRS will enforce deadlines and penalties again for Tax Year 2018.
However, with Democrats having taken control of the House, it’s unlikely that ACA regulations will progress in any direction. The individual mandate is not likely to return at the federal level, but as they have with 1099-K thresholds, states have begun taking the matter of individual mandates into their own hands.
Massachusetts has had an individual mandate in place since 2006, and New Jersey passed an individual mandate effective Jan. 1, 2019. Vermont’s mandate will take effect on Jan. 1, 2020. Lawmakers in Maryland and Hawaii have introduced legislation to mandate individual reporting, and several other states plus Washington, DC, have proposed individual mandates.
Companies need to be ready to adapt to changing requirements in multiple jurisdictions, as more states are likely to introduce individual mandates and either introduce or shift employer mandates.
7. IRPAC will likely play a diminished role
The voice of tax information reporting will likely speak a little more quietly to the IRS as the agency brings IRPAC, the Information Reporting Program Advisory Council, under the umbrella of a larger, less specifically focused organization.
IRPAC and Advisory Committee on Tax Exempt Government Entities (ACT) will join the broad-based Internal Revenue Service Advisory Council, or IRSAC. IRPAC has served as an important champion for raising tax information reporting issues directly with the IRS.
The dissolution of an independent IRPAC will likely lead to fewer opportunities for reporting professionals to communicate with the IRS. Concern in the reporting community is that IRSAC will deal more with consumer discussion points such as form 1040 issues. Membership in IRSAC will also be harder to obtain than it was in IRPAC, so fewer organizations will have direct access to an IRS advisory body.
Sovos has been helping companies reduce risk, increase efficiency and navigate the changes in 1099 reporting regulation and other areas of tax reporting for more than three decades. Contact Sovos to discover more.